Appraisers use three approaches when appraising to determine the market value of real estate property. These are:
1. Income approach
2. Cost approach
3. Sales comparison approach.
Let’s say you hire an appraiser. If your property has productive land and buildings, the appraiser will combine all three approaches to determine market value. If there are no buildings, then only the income and sales comparison approach would be used. If there are only buildings, then the cost and comparison approach are used. But, if there are no buildings and the land is non productive, then the appraiser is relegated to only the sales comparison approach.
Here’s how the sales comparison approach works. The appraiser begins by researching recent sales of properties similar to the subject property (the property being appraised) that are located in the same area as the subject. The second step is to select the most relevant comparable sales (comps.) The third step is to make value-based adjustments to the actual sale price of each comp. These adjustments are made to account for significant differences between the subject and each comp. Such differences might be size, road frontage, configuration of the property, location, topography, soils, location, amenities, etc.
These adjustments are not determined by certainty, but rather by the changeable and unfixed opinion of the appraiser. Here’s an example:
A Callaway County owner called to list her farm. After I had looked at the land and reviewed the comparable sales, I suggested a list price of $745,000. That’s when she told me the property had been appraised at $675,000. When I read the appraisal, I noted that the appraiser and I had used the same comparable sales, but made different adjustments. I listed the property at my suggested list price and a few months later the property was under contract for $741,000. The lender hired the same appraiser who had appraised the property for the seller a few months earlier at $675,000. This time, using the same comparables, the same appraiser valued the property at $741,000, the selling price. He “unfixed” his original adjustments to a new market value.
Most of the Missouri counties do not require the reporting of sale prices of real estate to the county assessor. Since there are no public sales records, the appraiser must obtain sales data from either the principals, other appraisers, real estate agents, or the Realtor’s Multiple Listing Service (MLS.) Since the MLS sales information is easy to obtain, some appraisers go the easy route. Here’s what can happen when an appraiser does not research properly.
Our client owned a Montgomery County farm. One month before he called me, the farm had been appraised for $560,000. When he and I met, he asked me to read the appraisal. The appraiser had failed to include three local sales that were ideal comparables. The sales were closed without any real estate agents. Apparently he searched for sales only on the MLS. The seller was aware of these sales and was sure the property had been over valued by at least $150,000. This was confirmed a few months later when the property sold. The bank’s appraiser used these threes sale as comparables and the property was appraised for $400,000.
Not all sales are comparables. Here’s an appraisal where the appraiser did not distinguish sales from comparables.
The owners had their 135 acres of steep and wooded land appraised at $3,600/ac. The problem was the “comps” were not comparables, but just sales that had no similarity to the subject property. One sale was outside the market area. Two sales were a combination of woodland and cropland and less than 50 acres. The appraiser even used the price on a listed property as a comparable, which is never acceptable. These blunders resulted in the appraised value being 40% above market value.
There are licensed appraisers who use their resumes rather than their skills. This was the case with this 25 year experienced, college degree appraiser. The client was charged $500 for a worthless appraisal of a 120 acre Warren. The 120 acres was all wooded and divided by a meandering stream. The appraiser used three crop farm sales that had no similarity to the subject property. In addition, the appraisal report did not include an aerial, soil, topography or location maps of the subject property which would indicate she did not have them. It seemed the appraiser would “wow” the client with her resume rather than a creditable appraisal. The 20 page appraisal had more pages devoted to the resume than to the appraisal of the land. The appraisal was nearly 50% above market value.
These four appraisals had one feature in common. They were all written on forms approved by the Appraisal Standards Board of the Appraisal Foundation and the Certification Standard of the Appraisal Institute.” This “fill in the blank” form requires only the bare minimum of information. The comparable sale page is so condensed that even other appraisers cannot determine the validity of the comparables.
The public is under the false assumption that every appraiser is skilled, conscientious and thorough. After all, they are licensed by the State of Missouri. So, how does a landowner find a reliable land appraiser?
If you have land to appraise, contact the local Farm Credit Service office. They have a staff of land appraisers and an additional listing of independent appraisers they recommend. Many on their list are the same appraisers I recommend to land owners.
Even though the sales comparison approach has many flaws, it is the only way to attain a ballpark value of rural unproductive land. That is why the appraiser’s opinion of value should be viewed as an educated guess.